Contributed by Robert Lyman © 2019
Robert Lyman is an Ottawa energy policy consultant and former public servant and diplomat. His biography is here.
Last week, the Parliamentary Budget Office (PBO) published a report in which it estimated that, in order for Canada to reach its self-imposed target of a 30% reduction in greenhouse gas emissions by 2030, the carbon tax rate would have to increase from $50 per tonne in 2022 to $102 per tonne in 2030.
LINK TO FULL REPORT: THE STAKES ARE TOO HIGH TO BE TRICKED BY THE NUMBERS (2)
Canada’s political target (there are no legal obligations) is to reduce greenhouse gas (GHG) emissions by 30 per cent below 2005 levels by 2030. National emissions in 2017 were 716 million tonnes (Mt) of carbon dioxide equivalent, and the 2030 target is 513 Mt, so the goal we have imposed on ourselves is a reduction of 203 Mt in just over 12 years. The policy framework for this is the Pan Canadian Framework for Clean Growth and Climate Change.
As further background, global emissions continue inexorably to rise. They have risen in 23 of the last 27 years, and they rose by two per cent in 2018, twice the average annual rate over the previous decade. This is due to economic and population growth in Asia and the Middle East. Canada’s emissions account for 1.6 per cent of the global total.
In theory, carbon taxes are ideal policy instruments to reduce emissions, when they provide clearer and more comprehensive signals to buyers and sellers as to how they should change their behavior. If the revenues received from the taxes were returned to taxpayers through a reduction in the rates of other generally applied taxes like corporate income taxes, the recycling of revenues back into the economy might even stimulate the economy. In practice in Canada, carbon taxes have just been added on to over 600 existing regulations, subsidies and other programs, eliminating whatever theoretical advantage they might have had. Further, rather than recycle the funds completely and in ways that stimulate the economy, Canadian governments have adopted a balkanized regime in which some provinces (e.g. Quebec) simply use the funds for other public programs and the federally-imposed regime is designed to achieve income redistribution rather than emissions reduction or economic stimulus. Politics, not economic theory, has been the prime influence on the design of the Canadian carbon tax system.
To assess the effects of carbon taxes on the whole economy, both Environment and Climate Change Canada (ECCC) and the PBO used mathematical representations of the economy called “general equilibrium models”, or CGE models. These models are based on the theory that economies move inexorably from one state of “general equilibrium” to another, with relatively low “transaction” costs, or costs of change. They measure the effects of policy changes on income, employment, trade and investment, but they do not attempt to assess who the winners and losers in the economy might be.
Results of Model Projections
ECCC projected results of the implementation of policies under the Pan Canadian Framework to 2030. These include the policies and programs implemented by federal and provincial governments since 2015, the carbon pricing systems, and the additional measures that have been announced but not yet fully implemented. They also include a reduction in emissions attributable to Land Use, Land Use Change and Forestry (LULUCF). Reviewing their results, I found:
- The 48 Mt reduction in the electricity sector appears to be premised on the almost complete phase out of coal-fired power plants, which in 2017 produced 57.4 Mt, by 2022. The current Alberta regime foresees coal-fired power plants operating until 2030.
- The projected 33 Mt reduction in transportation emissions is surprisingly large. The only significant potential for emissions reduction in this sector lies in reduced emissions from light duty passenger vehicles. In 2017, cars, SUVs and pickup trucks emitted 85.1 Mt, so a 33 Mt reduction is 39 % of that. It is virtually impossible for carbon taxes to have so large an effect during a period when they will be phasing up to 11 cents per litre on the price of gasoline; 11 cents per litre is only an 8% increase in the national average pump price of $1.35 per litre in 2018.
- The projected 22 Mt reduction in emissions from buildings by 2022 marks a 24% reduction from 2017 emission levels of 85 Mt. Again, carbon taxes alone will be far too low to produce such a reduction. Is the government signaling that it will impose expensive requirements for the retrofitting of all existing buildings?
PBO Analysis and Implications
ECCC acknowledged in its fall 2018 report that the measures taken and anticipated to date would not attain the 2030 emissions reduction target. The purpose of the PBO report was thus to determine how the target might be achieved relying exclusively on increased carbon taxes. PBO assumed that, over the period to 2030, the Canadian GDP would increase by 28 per cent, and the population by 16 per cent. This growth, however, has no effect on emissions. (Presumably, this is based on the further assumption that the increases in national income and population are offset by improvements in the emissions intensity of the economy.)
The PBO report concluded that, to reduce Canada’s emissions by 79 Mt and attain the target, an additional carbon price rising from $6 per tonne in 2023 to $52 per tonne in 2030 would be required. Thus, with the new taxes plus the $50 per tonne tax in place in 2022, in 2030 households and businesses would face an explicit carbon price of $102 per tonne, along with a host of “complementary measures”. PBO then proceeded to show how, using the ENVISAGE CGE model, the effects on GDP would be minimal, meaning a 0.5 % reduction in GDP arising from the carbon price of $50 per tonne, plus an additional -0.35 % reduction arising from the incremental taxes by the year 2030.
Reviewing the PBO results, I found:
- The largest impact is in the oil and gas sector. Emissions reductions of 37 Mt against a base of 195 Mt in both 2017 and 2022 means a 19% reduction in oil and gas emissions over eight years. As the changes are allegedly driven exclusively by new taxes, one can presume that most or all of the impact would fall upon the costliest production, which is from the oil sands. Oil sands emissions in 2017 were from mining (16.4 Mt), in situ production (41.7 Mt) and upgrading (22.4 Mt), for a total of 80.5 Mt. A 37 Mt reduction from the oil sands would be a 46% cut.
- The 52 MT reduction in transportation emissions by 2030, if imposed entirely on light duty passenger vehicles, would mean a 61% reduction from 2017. There appears to be no way this could be accomplished on the basis of taxes alone, as even a $102 per tonne tax means only a 23 cent per litre tax on gasoline, an increase motorists would bitterly resent but largely ignore in their driving habits (as has been shown in the high tax European regimes). An emissions reduction this large is simply not credible, absent major new regulatory restrictions on transportation.
Both analyses ignore the reality of forcing large emissions reductions on people’s lives. Whether done by taxes or regulations, emissions reductions measures will raise the costs for business that cannot be passed on to consumers when competing firms that do not face the same taxes have their costs left unaffected. The rates used in carbon tax regimes in other countries vary widely from a low equivalent to US $1 per ton in Mexico and Poland to a high of US $139 per ton in Sweden. Within western Europe, the rates range widely as well, with one group of countries using rates of US $9 per ton or less, and most others with rates in the range of US $16 to $29 per ton. In China, the average rate is about US $2 per ton. As carbon taxes and/or the costs of regulation rise ever higher in Canada, firms will move their investment, and ultimately their headquarters and operations, to lower-cost jurisdictions.
In fact, Canada’s economy is uniquely vulnerable to the adverse effects of emission-reduction measures that raise costs. Here, where 48 per cent of the GHG emissions occur in two provinces (Alberta and Saskatchewan), where much of the economic activity is in energy-intensive resource-based industries, and where climate and geography give rise to higher energy demands than in most other countries, an all-out effort to reduce fossil fuel emissions will be especially detrimental, both in economic and political terms.